Should I take the lump sum pension or annuity? You are retiring soon, and you have a pension plan. Should you take the annuity payout or lump sum? Should you transfer to a better annuity instead of the plan’s payout option. This guide will go over the pros and cons so you can weigh your options to choose from.
Upon retiring, companies that offer a retirement pension will typically offer 2 options on how the retiree enjoys their benefits, taking a lump sum of money or a payout for a fixed period of time or a lifetime. If the owner chooses the lump sum option, they can move the money wherever they please. If the owner chooses the payout option, they are utilizing an annuitized payout from an annuity.
There is a 3rd option: choosing the lump sum and transferring the funds to a deferred annuity with an income rider. The owner can supplement their guaranteed income for life with more flexibility throughout retirement by going this route.
Pros and Cons
There are significant pros and cons when making this decision. Below is a “T-Chart” weighing both the good and the bad.
| Income Rider | Pension Income |
|---|---|
| Guaranteed income for life | Guaranteed income for life or fixed period |
| Flexibility to start/stop income stream | Potential higher payouts |
| Potential paycheck increases for inflation. | No additional fees |
| Costs range from no cost to 1.25% annually | Irrevocable payments |
| Potential to earn interest | Can not be surrendered; No refunds. |
| Future income guaranteed today | Earns approximately 1% interest annually |
| Can be surrendered or cashed in | No liquidity |
| Lump-Sum Death Benefit | No death benefit or series of payments |
| Help with long term care costs | It cannot help healthcare costs |
| Standard liquidity |
The Risk of Pension Plans
Taxes
Like other qualified retirement plans and annuities, the income is subject to Federal and State taxes.
Pension Payouts Options
Pension plans utilize annuities to distribute an income to their retired employees. The following are typical pension payout options:
- Life Annuities: A life annuity pension is a fixed-income contract in which an insurance company commits to paying income payments throughout the annuitant’s lifetime.
- Joint and Survivor Annuities: A joint and survivor annuity is a life annuity (two lifetimes) that provides income to the last surviving covered individual until death.
- Refund Annuities: A refund annuity is a contract that guarantees that a particular amount will be paid, no matter when the annuitant passes away.
Pension Companies
- NJ State Retirement Plan
- Central States Pension Fund
- IAM
- Military
- Church Pension Group
- GE
- Kentucky Retirement Plan
- USPS
- FRS
- Calpers
- NFL
- NYS Retirement Plan
- FERS
- Calstrs
- Central Pension
- Ohio Police and Fire
- UPS
- FedEx
- Maryland Retirement Plan
- MA Pension
- Texas Pension
- MLB
- NBA
- PCOA
Maximizing a Pension
If you choose the pension payout option, watch this video on how to get the most out of your payments and protect your spouse financially at the same time.
Conclusion
Now you have a better idea of what you gain and what you give up. The logical next step would be to compare the retirement income potential you can receive with your current retirement plan.
Use a pension lump or annuity calculator.
Feel free to request a quote to compare and contrast your retirement income options here.